India looks to US in attempt to boost FDI, revive rupee

Finance Minister P Chidambaram is in the United States this week to drum up investment from the likes of Lockheed Martin, leaving behind a Cabinet far from convinced about his plans to revive the economy and a record low rupee.

Chidambaram won investor approval last year for plans to rein in fiscal deficit but he is struggling to push through proposals to relax rules on foreign direct investment (FDI) in defence, telecoms, pharmaceuticals and retail.

Economists say it is critical for India to boost FDI because the long-term nature of the investment has a more stable influence on the economy. On the other hand, the fickle flows of portfolio investment can have a destabilising impact.

In June alone, $7 billion in portfolio investment fled the country amid a wider emerging markets selloff over concerns that the United States was preparing to rein in its monetary stimulus.

The rupee hit a record low below 61 per dollar on Monday and is the worst performing emerging markets currency in Asia this year of those monitored by Reuters daily.
It is under pressure from India's weakest economic growth in a decade and a record high deficit in the current account, the broadest measure of a country's international trade, of 4.8 per cent of GDP last fiscal year.

To try to revive FDI, which has fallen in three out of the last four fiscal years, Chidambaram last month mooted plans to loosen investment for foreign companies in a broad swathe of industries. He had hoped to secure cabinet approval this month.

He flew to the United States on Monday for meetings with the CEOs and other top executives of potential investors, including Microsoft Corp, Wal-Mart Stores Inc, Lockheed Martin International and Boeing International. He is due to return to India on July 14.

Just ahead of the trip to persuade the US companies to invest in India, two ministries leaked letters outlining their opposition to the latest FDI plans. One ministry also briefed journalists about its disagreements with the finance ministry over the proposals.

“Retrograde step”

In one letter, the Defence Minister A K Antony, a powerful member of the cabinet, told the industry ministry a plan to allow foreign weapons manufacturers to invest up to 49 per cent in defence joint ventures represented a danger to India's defence interests.

"Allowing foreign companies to set up manufacturing/assembly facilities here will be a retrograde step," Antony said in the letter, an excerpt of which was seen by Reuters. He said the cap on foreign investment in defence companies should remain at 26 per cent, except in special cases.

The home ministry wrote a letter late last week to Commerce and Industry Minister Anand Sharma, who oversees foreign investment policy, saying any new proposals in telecoms, defence and space research should take into account security concerns, an official told Reuters.

Industry ministry officials have also privately raised objections, saying a plan to raise the cap on foreign ownership in supermarkets to 74 per cent was unnecessary.